MUMBAI: Gilt funds and income funds (medium and long term debt schemes) seem to be the flavour of the season. Financial investors are recommending them to their clients, who are lapping them up. If you look at the performance of the category in the past one year, you would understand why. For example, gilt schemes in the medium & long term category have given an average return of around 14.65% in the past one year.

Gilt schemes in the short term category averaged around 7.61% in the last year. Debt schemes in the medium term category have returned around 9.31% and the short term category has offered around 10.10% in the same period. (See table: How they fared last year).

Quite a big deal if you consider the state of affairs in the stock market. The market barometer BSE sensex was down by over 50% in the past one year. Diversified equity schemes as a category has given negative returns (-52 %). In fact, every equity scheme in most categories tax planning, small and mid cap, and so on has offered negative returns to investors in the same period.

So, is it time to opt for gilt and income schemes? “If you have an investment horizon of six months to one year, you can invest in gilt and medium and long term debt schemes anytime, as timing is not a big issue here,’’ says a senior fund manager.

However, investing in debt schemes also requires a bit of research, say some financial advisors. This is because any changes in the interest rate scenario could alter the fortune of these schemes drastically. For example, these schemes typically tend to do well in a falling interest regime.

However, once the rates starts firming up, these schemes lose their sheen. So, where are we now? Is there still scope for further reduction in interest rates? “Though the RBI hasn’t reduced rates in its latest policy review, we still believe that there could be further rate cuts in the near future. We believe that the RBI would cut rates by 1% within the next six months. If that happens, these schemes will continue to do well,’’ says a senior fund manager.

The central bank has left key policy rates untouched in its third quarter review of the 2008-09 monetary policy on Tuesday. However, D Sundararajan, an investment consultant with Trendy Investment, would like investors to wait for sometime before taking a call on investing in gilt and income schemes.

“The government securities market has been extremely volatile in the last 20 days since the announcement of a huge auction of securities by the government. Gilt schemes lost around 6% in a day, something which is unheard in the past,’’ he says.

“Investors should wait for the 10-year (government security) yield to come down to 5% from the current level of around 6%. Once it touches that level, they can invest their money in a mix of income and gilt schemes,’’ he adds.

source: Economictimes

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